QUESTIONS 11 TO 15 A firm is considering the purchase of a new computer for S300
ID: 2785689 • Letter: Q
Question
QUESTIONS 11 TO 15 A firm is considering the purchase of a new computer for S300,000 fully installed. It is expected to have a salvage value of $100,000 after 3 years. Annual revenues from operations will be $500,000 each year and annual operating and maintenance costs S100,000 Depreciate the computer using the DB method (d=20%). The before-tax interest rate is 10%. The after-tax interest rate is 5%. A 50% tax rate applies to net income from operations and to the recapturing of · · The half-year rule applies The firm gets a $150,000 loan at a 10% rate of interest) which is repaid as follows Repayment of loan at the end of year Percentage of loan repaid 25 35 40 End of Year Cash Flows Item 1. Before Tax Cash Flow 2. Annual Depreciation 3. Interest Expense 4. Taxable Income 5. Taxes Payable 6. After Tax Cash Flow Engineering Eoonomics ECO 1192 Page 3 Practice Examination W2 End of Year Cash Flows Item 7. Interest Expense 8. Loan Repayment 9. Cash Flow on Owner 11. The dollar value of cell AA is a) 30,000 b) 54,000 c) 60,000 d) 48,000 e)None of the above answers 12. The dollar value of cell BB is a) 30,000 b) 54,000 c) 60,000 d) 48,000 e None of the above answers 13. The dollar value of cell CC is a) 15,000 b) 11,250 c) 6,000 d) 5,000 e) None of the above answersExplanation / Answer
13) Interest is charged on the Principal Amount remaining after any repayments. Since, 25% of the principal is repaid in the first year, the interest for the second year (cell cc) would be charged on the remaining 75% of the principal amount -
Interest = $150,000 x 75% x 10% = $11,250
To better understand this, here is the repayment schedule table -
$37,500
(25% of 150000)
$52,500
(35% of 150000)
Year Opening Balance of Loan Interest @ 10% Accumulated Balance Principal Repayment Total Amount to be paid Closing Balance of loan 1 $150,000 $15,000 $165,000$37,500
(25% of 150000)
$37500+$15000 = $52,500 $112,500 2 $112,500 $11,250 $123,750$52,500
(35% of 150000)
$52,500+$11,250 = $63,750 $60,000 3 $60,000 $6,000 $66,000 $60,000 $66,000 $0